Bucharest urges local government to borrow from banks despite warnings from IMF and EC

By Julian Ernst March 21, 2017

Romania’s local administration can co-finance the EU-funded projects from bank loans at interest rates lower than the financing cost of the Treasury, Romania’s central government reportedly recommended in a message circulated on March 20 and published by cursdeguvernare.ro, an independent online resource centre dedicated to public sector monitoring. The puzzling recommendations came amid broad concerns about the country’s projected fiscal slippage to 3.7%-3.8% this year and even more in 2018.

The recommendation, combined with the loosening of the financing at local level (under controversial government orders 6 and 9, endorsed by the lawmakers), open the door to excessive indebtedness of the local administration and a potential default of the debt that would not be guaranteed by the state.

The government lifted the indebtedness restrictions for the local administration, according to the recommendations quoted by the media. Consequently, the local administration can now borrow in excess of 30% of their revenues over the past three years and in excess of the limitations set under the 2017 budget planning law.

The central government’s recommendation comes after the budget earmarked for co-financing of EU-funded projects was exceeded. The finding, striking for its timing (just before the end of Q1) was reportedly admitted by local administration minister Sevil Shhaideh on the same day, cursdeguvernare.ro informed.

In a statement on March 20 at Antenal TV, Prime Minister Sorin Grindeanu rejected all the concerns expressed by the International Monetary Fund experts who visited Romania last week. He stressed that the government will go forward with all the measures outlined in the ruling strategy. The IMF warned that the impact on the budget would be another 2.4% of GDP (in addition to the 2.1% of GDP impact of the measures already enacted). The enactment of the rest of the measures in the ruling coalition’s strategy would bring the deficit to 5%-6% of GDP. The calculations do not include second-round, positive effect, the IMF commented.

The tension over Romania’s fiscal policy mount as the EC commissioner for regional policy Corina Cretu commented on the same day that the EC still expects Romania’s plans on fiscal consolidation. She mentioned the very real risks of infringement. The EC invited Romania to submit a credible plan to bring the budget deficiency within the Maastricht criteria, if not under the tighter limitation of the Fiscal Compact that the country became a member of. Unless the country submits the plans before the Spring Forecast, the EC is likely to draft a more critical projection which, beside the IMF’s negative comments possibly included in the Article IV consultations report, would have an impact on investors and hence also the exchange rate and the Treasury’s financing cost.

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